What is salary sacrifice and how does it save tax?
Salary sacrifice is one of the most efficient ways for UK employees to save into a pension. By giving up part of your gross salary in exchange for a higher employer pension contribution, you avoid both income tax and National Insurance on that amount — a double saving that ordinary pension contributions don't capture.
How it works
In a standard pension contribution, you pay from your net (post-tax, post-NI) salary, and HMRC adds basic-rate tax relief back. Higher-rate taxpayers can reclaim additional relief through Self Assessment.
With salary sacrifice, you formally agree to a lower gross salary in your employment contract, and your employer pays the difference directly into your pension as an employer contribution. Because your gross salary is lower, neither you nor your employer pays National Insurance on the sacrificed amount, and your income tax is calculated on the lower figure.
The maths: a £100/month example
Suppose you want to add £100 per month to your pension.
- Standard contribution (basic rate): You contribute £100 from net salary; HMRC tops it up with £25; the pension receives £125. The £100 came from net salary, which originally cost you about £147 of gross salary (after 20% tax and 8% NI). Net cost: £100 of spending power, £125 in the pension.
- Salary sacrifice (basic rate): You give up £125 of gross salary; the pension receives £125. You save 20% income tax + 8% NI on that £125, which is £35. Net cost to you: £125 - £35 = £90 of spending power.
Same £125 in the pension, but salary sacrifice cost you £90 instead of £100 — roughly a 10% efficiency gain for a basic-rate taxpayer. For higher-rate taxpayers (40% tax, 2% NI above the upper earnings limit), the gain is larger still.
The employer NI saving
Employers also pay National Insurance on your salary, at 13.8% above £9,100 a year. When you sacrifice salary, the employer's NI bill drops too. Many UK employers pass some or all of this saving back into your pension as an extra contribution, which can add another 5–13% to the contribution at no extra cost to you. Whether they do so depends on the company's salary sacrifice policy — worth checking.
Limits and watch-outs
- Annual allowance. Salary sacrifice contributions count towards the £60,000 annual allowance (2024–25), which is tapered for very high earners. Going over the allowance means a tax charge on the excess.
- Minimum wage. You can't sacrifice salary below the National Minimum Wage. This is rarely a constraint for salaried roles but does cap how much minimum-wage employees can use salary sacrifice.
- Mortgage applications. Some lenders calculate borrowing capacity from your reduced gross salary, not your pre-sacrifice figure. Check before applying for a large mortgage.
- State benefits and pensions. Statutory maternity pay, redundancy pay and similar are calculated on your reduced salary. The State Pension also depends on years of NI contributions — but you still earn qualifying years as long as your reduced salary stays above the Lower Earnings Limit.
- Life insurance. Death-in-service cover is sometimes calculated on your reduced salary; check with HR.
When salary sacrifice is most valuable
- For higher-rate taxpayers — the marginal saving is largest.
- For employers who pass back all or part of their NI saving.
- For employees willing to lock the money in until age 55 (rising to 57 from April 2028).
- For people approaching or already in the high-income child benefit charge band (£60,000+) — sacrifice can reduce taxable income below the threshold.
Run your own numbers
The Pension AI planner has a salary sacrifice toggle that applies the correct tax and NI savings to your contribution rate, so you can see the real impact on your final pot rather than estimating with rules of thumb.